How easy is it for an American to avoid paying tax on Canadian-based revenue?
October 28, 2010 3:40 PM   Subscribe

As a U.S. resident and citizen, what happens if I neglect to claim income from a Canadian company?

I make a living online getting paid through various companies. I submit a W-9 to the U.S. companies, but there are a couple Canadian companies in the mix.

I know that we're SUPPOSED to claim all income sources. But if someone were to neglect to claim income from a Canadian source, what are the chances of getting caught by the IRS?

We're not talking huge amounts here: generally from $500 to a few grand.

I'm asking as a hypothetical, and have no intention of cheating on my taxes. I'm hoping to avoid sermons on ethics or replies that amount to "shame on you for asking." Thank you in advance!
posted by Mushpuppy to Work & Money (6 answers total) 1 user marked this as a favorite
Practically speaking, the odds are low. I may or may not have done the reverse of what you describe.
posted by GuyZero at 3:44 PM on October 28, 2010

I'm not sure on the US side - butif hte countries were reversed - you would potentially face large fines for failing to declare the foreign assetts, regardless of the amount involved IIRC.
You would also only pay interest charges and no penalty

I believe the IRS operates similarly - there is likely an amnesty regarding this - so given the small amount, just do the right thing and settle up properly, especially if it's a small amount - then you don't have to worry about it.

Someone familiar with the US tax code can likely give a more accurate answer - I imagine the legal penalties for failing to disclose are worse than the taxes you would pay.
posted by TravellingDen at 3:53 PM on October 28, 2010

Pretty much the same thing that happens if you mess up your filing in any other way.

If the IRS decides there is a discrepancy in your taxes they'll decide independently what you owe, including late fees, and send you a nastgram informing you how much you owe.

At this point its up to you to either pay or provide documentation about why you don't owe that much. At this point you are guilty until you can prove your innocence. Since you wouldn't be innocent you'd be stuck with paying not only back taxes, but paying late fees as well.

I think they'd have up to 7 years to do this, which makes the late fees add up.

(If the taxes and the late fees are substantial and screw you to the wall they're often willing to settle, but it's messy, lengthly, and usually requires an attorney.)

*Not a tax expert.
posted by Ookseer at 4:00 PM on October 28, 2010

I'd talk to a lawyer or accountant as appropriate... while it may not be much money, and the odds of them auditing you just for failing to declare it are pretty low - if they DO audit you for some other reason (usually the ex girlfriend/wife) , and then find these, you'll be on the hook - keep that in mind. Perusing online US tax resources, there seem to be fairy stiff penalties for unreported foreign holdings and income. It's in no way excluded - income is income.
posted by TravellingDen at 5:54 PM on October 28, 2010

posted by bshort at 8:57 PM on October 28, 2010 [1 favorite]

To correct Ookseer:

The IRS has 3 years to audit a tax return. If you receive no letter within three years from the date that you filed, you're probably in the clear.

HOWEVER, the IRS has no time limit for auditing fraudulent tax returns - cases where one intentionally deceives the government. (false identity, intentionally hiding assets, etc.)

The onus is on you to defend against an audit and appeal their decision, but the onus is on the IRS to prove fraud if they want to open a case greater than three years old.

Once the IRS rules, they have 10 years to collect on any money that you owe. But, you can expect them to act pretty forcefully before that.

It's actually pretty damn rare for someone to go to prison for tax evasion. Usually, like most creditors, they'd just rather have their money.

Lastly, if you do get audited, you're going to want a good tax attorney whether you believe you owe them or not. Fighting the IRS is really difficult.
posted by Citrus at 9:40 AM on October 29, 2010

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